US Taxes Explained Simply

[Bond]

Well, this is true. I think the analogy has a few more key takeaways as well:

- Is there an inherent problem with a tax system in which those who utilize the most government services (the first four men in this analogy), pay nothing in taxes? This seems to be an extreme free rider problem. In contrast, why are we providing / offering the same government services to the poor and the rich (shouldn't some of the core entitlement programs be means tested?)?

- I know I've said this before, but tax rates and tax revenue are not correlated (at the most, they are very loosely correlated). Tax revenue is much more correlated with GDP growth. The single biggest tax revenue year (in terms of total money collected by the government) was the year after the Bush tax cuts. This seems to be counter-intuitive, as tax rates were lowered, but that year also saw a quite significant uptick in GDP growth, hence increased tax revenue.

- In conjunction with the above point, we can see that debates over what tax rates should be for the wealthiest Americans, etc. are political debates, not economic debates. As I've said before, the best way to increase tax revenue would be to adopt a modified flat tax structure, in conjunction with an increase in growth over the anemic pace of the last few years.

- The analogy is easy to tear apart under a strict economic view, as referenced by above. The important thing to remember is that whenever the government intervenes in the free market it necessarily creates inefficiencies. Business is not the government's game. A very reputable argument can be made, though, that the government should intervene in certain areas for social justice reasons, but rarely for economic reasons. The most effective government intervention in the economy comes when it subsidizes a prevailing trend (ex. GI homes post WWII). Notice, though, that this is not the government influencing or controlling a shift in behavior, but rather reinforcing a trend that already existed. So, intervening for social justice reasons often makes sense, but not when it comes at the expense of creating huge unfunded liabilities that threaten to bankrupt the country and stifle economic growth.